Cryptocurrency guide for beginners — the fundamentals

Coins2Learn helps beginners to learn how to invest in cryptocurrency and experts to profit more from trading strategies.

Whether you want to take up trading for a living or find out if it’s possible to make money with Bitcoin, you have an exciting journey ahead in the crypto market.

Cryptocurrency trading is a new frontier, more open and accessible than any other financial markets in history — and you don’t need a large starting portfolio, a broker, or permission from an institution to participate. However, it’s unlikely that you will learn to trade profitably overnight. To earn the greatest rewards, you’ll have to put in the time to educate yourself about blockchain technology and the crypto market.

This article will teach you the fundamentals: all of the key information that you must know in order to learn how to day trade or make your first cryptocurrency investment safely.

How does cryptocurrency work?

Cryptocurrencies are a purely digital form of money that functions with blockchain technology. This might seem strange at first, but if you’ve ever used a credit/debit card, PayPal, or a mobile payment app, then you’ve already used a digital form of currency before. In fact, it’s estimated that over 90% of the world’s total money supply only exists digitally.

Now, one of the first things you may think is “How can I buy Bitcoin when it costs $10k? 😫”. This is a common misconception about cryptocurrencies to think that they must be bought whole, but the reality is that they are highly divisible. For instance, it’s possible to buy as little as 0.00000001 BTC (worth 1% of $0.01 at the time of writing). This means that cryptocurrencies can be easily used in the same way as cash for small everyday transactions.

Also like physical money, cryptocurrencies are stored in wallets. They come in many forms, including simple pieces of paper, mobile or desktop apps, and even hardware wallets that look like a typical flash drive. Each cryptocurrency wallet has an address associated with it, which is a random string of letters and numbers that looks something like this:

yNG5Mvk0kCYRCoYiNiDjd4D6ErT3kUM4

To send cryptocurrency to a friend, you would ask them for their wallet address and then copy and paste it into the ‘To’ or ‘Recipient’ box of your own wallet app.

Nowadays, it’s also possible to connect an email or a web domain with your address so that you can receive transfers via those simpler names instead of a string of random characters.

The role of blockchain technology in this process is to enable your transaction to be processed without involving a bank, government, or any other institution. In other words, you can use a blockchain to transfer value without having to trust a third party or middleman in the process. That’s why Bitcoin’s creator, Satoshi Nakamoto, named it a “peer-to-peer” electronic cash system in the Bitcoin whitepaper.

A blockchain is basically a way of recording a transaction history by tracking the amount of cryptocurrency that’s currently in every wallet in the network. This record of balances can then be used to determine whether pending transactions are valid.

For a transaction to be valid, the amount being transferred from the sender’s wallet needs to be less than the amount in the wallet at the time of the transaction. That may seem obvious, but the point is that having enough funds is all that you need to make the transfer. Transactions are processed by independent participants, called miners, who don’t require any information about your identity, ethnicity, sex, geographic location, social status, or any other factors.

Blockchains are tools that make this validation process possible while simultaneously limiting the power of miners to ensure that they process transactions honestly, creating a decentralized network that no individual or group controls on their own. This differentiates cryptocurrencies from fiat currencies (e.g. USD, EUR, BRL, YEN, etc.), which are controlled by governments and central banks.

What gives Bitcoin its value if it isn’t backed by anything tangible?

After answering the question, “What is Bitcoin and how does it work?”, the next question people often have is: “Why is Bitcoin valuable?”.

Deeply understanding Bitcoin’s value proposition typically requires a lot of time and effort, even for people who are technically savvy. So bear that in mind as you read the rest of this section in case it doesn’t immediately make sense.

One answer to this question is to list important properties that Bitcoin has such as divisibility, fungibility, and transferability which make it viable as a currency. An even more important property is scarcity, as this differentiates Bitcoin from fiat currencies and makes it attractive as a potential store of value.

The total supply of Bitcoin that will ever exist in the crypto market is hard capped at 21 million, more than 80% of which have already been mined. New Bitcoins are mined at a rate that gets cut in half every 4 years (approximately), which you can see with the blue lines in the chart below. This means that Bitcoin’s inflation rate (currently 3.77%) will drop below 2% by mid-2020 and will eventually reach zero.

All of those properties play a role in making Bitcoin valuable, but ultimately the biggest reason that Bitcoin is worth something despite not existing in a physical form or being backed by a government is that Bitcoin is governed by open-source code instead of human beings.

So the answer to the question of “Should I invest in Bitcoin?” is actually a question itself. That is, which do you trust more: open-source computer code that no individual or group can control, or the unelected government officials who run your country’s central bank?

The history of Bitcoin’s price

The original cryptocurrency, Bitcoin, first went live in 2009 with a value of less than $0.01. As more people heard about it and began to mine or buy Bitcoin, the price steadily climbed. This period of positive price movement, called a bull market, lasted until July 2011 when the BTC price peaked at $31.

Bull markets are so named because bulls attack by thrusting their horns upward. The opposite of a bull market is a bear market, as bears attack by swiping their paws downwards.

Since the end of that first bull market, Bitcoin has gone through multiple bull-bear cycles — each making the one before it appear insignificant in size. For this reason, it’s useful to look at the Bitcoin to USD exchange rate history on a logarithmic chart as well as a regular linear chart.

Now it’s possible to appreciate Bitcoin’s complete history and to see the peaks of the bull markets and the valleys of the bear markets. This view is especially great for anybody who’s interested in long-term Bitcoin investment, as it can be used to estimate the magnitudes and time spans of future market cycles.

What is an altcoin?

A term you’ll hear a lot as a cryptocurrency trader or investor is “altcoin.” Short for alternative coin, this refers to all cryptocurrencies that aren’t Bitcoin. There are thousands of altcoins today, including Ethereum, Litecoin, and Dogecoin, and their purposes vary widely.

For example, Ethereum is a smart contract platform that can be used for practically endless different applications. We’ll explain much more about smart contracts in a future article, but for now you can think of them as a way to create programmable transactions that execute automatically. In other words, smart contracts allow you to take a simple transaction like Alice sends 1 coin to Bob and add extra conditions to it, such as:

Alice {automatically} sends 1 coin to Bob {on August 1st at 12:00:00 UTC}, {if Bob has completed a task assigned to him by Alice}, and {Carol and Dave independently verify that Bob completed the task adequately}.

Smart contracts can eliminate costly middlemen from all sorts of industries, making them a very promising technology for businesses of all sizes. For this reason, several other smart contract platforms have been developed in recent years, each differing from Ethereum in various aspects.

Platform cryptocurrencies are just one of many categories that can be used to sort projects based on their purposes. There are many coins focused on payments and privacy, as well as solutions for enterprises, digital media platforms, infrastructure protocols, and much more.

Once you’re familiar with the basics, you can use this Periodic Table of Cryptocurrencies to explore the top projects in each sector.

With so many different coins having different purposes, you might be wondering how to determine an altcoin’s value. Unfortunately, there is no one-size-fits-all equation for evaluating altcoins, especially because so many altcoins are young projects that have yet to develop working products or anything valuable at all.

For now, investing in altcoins is pretty similar to speculating on startups. You should research the industry the altcoin is meant to disrupt, the problems it intends to solve, and the viability of its business/economic model.

Remember: as in the traditional business world, not all projects in the cryptocurrency world will succeed. That’s why it’s a good idea for you to learn (like you are doing now 😊) and become familiar with the market before investing or trading with real money.

What is market cap?

Market cap (MC) means the total value of a cryptocurrency network. It is calculated by multiplying the price per coin by the number of coins in circulation. On popular cryptocurrency lists, market caps are used to rank projects rather than cryptocurrency prices. This is also the case in the traditional stock market, where the size of a company is found by multiplying its share price by the total number of shares.

One interesting metric to keep an eye on as you get into cryptocurrency trading is the % of the total crypto market cap held by each of the top coins.

As you can see in the above chart from TradingView, Bitcoin’s market cap has always been the largest of any coin, although Ethereum came within 10% of the top spot in 2017.

The #1 thing to know about altcoins as somebody who’s new to cryptocurrency investment is that they are historically far more volatile than Bitcoin. This is a consequence of having lower market caps and less liquidity, which means that large buy or sell orders can more strongly impact price. A small cap altcoin can go up by 50% or more in a single day, but the same can happen going down. Generally speaking, the projects with market caps outside the Top 50 are much riskier to invest in, so you should be careful if you want to make them a part of your portfolio.

How to navigate the crypto market

Day trading for beginners is all about managing risk and developing trading strategies so that you have time to gain experience in the cryptocurrency market. The more familiar you are with the market’s history, the better prepared you’ll be to predict how it will behave in the future.

The earlier section on Bitcoin’s price history provides a solid foundation, but what if you’re more interested in altcoins?

Well, the reality is that the prices of altcoins have remained highly dependent on Bitcoin throughout time, and nobody knows when or if this will change. It’s still entirely possible for an altcoin to go up while Bitcoin drops for a short time, or vice versa, but the long-term trends of the crypto market tend to move as Bitcoin does.

It follows that whether you want to learn how to invest in Bitcoin like a pro or you’re all about day trading altcoins, you still need to follow Bitcoin closely to be successful. The other key to profitability with altcoins is having a finger on the pulse of your favorite projects at all times. That means staying up to date on all the important news and developments, such as protocol upgrades, new cryptocurrency exchange listings, and community growth.

Oh, and there’s one more market phenomenon we should talk about: pump and dumps.

A pump and dump is a type of price action in which large groups of traders (or possibly small groups with large portfolios) manipulate the market by coordinating a surge of buy volume for a specific coin. This causes a quick jump in price, which catches the attention of other crypto traders who then also start buying to catch the gains. Then, the original buyers coordinate again to abruptly sell, driving the price back down as quickly as it went up and leaving the second wave of buyers with big losses.

Pump and dumps are illegal in traditional markets, but the global and decentralized nature of the crypto market makes them far more prevalent. Still, we recommend that you avoid participating in a coordinated pump and dump, for a few reasons:

There could be legal consequences in the future.

They are always risky — even if you’re part of the group who’s coordinating, you can still easily miss the selling opportunity and end up losing money.

They are bad for the crypto market because they make it more risky and volatile for everybody.

If you’re asking yourself, “Should I invest in Bitcoin?”, the answer depends on whether or not you’re willing to accept that high risk. In case you’re not sure, we recommend that you start gaining experience in our risk-free Bitcoin game which enables you to practice cryptocurrency trading on a simulator so that you can learn without losing real money.

Continue your journey

That’s all for our guide to blockchain technology and cryptocurrency for beginners. With this fundamental knowledge, it won’t be long before you can start to make money with Bitcoin.

As you become more comfortable in the crypto market, be sure to check out our intermediate guide for more important information about how the crypto market works.

Coins2Learn is more than a cryptocurrency trading simulator

We are a place for both beginners and advanced traders to learn how to invest in Bitcoin or how to day trade cryptocurrency, as well as start trading altcoins, practice skills, test strategies, or even become Bitcoin traders for a living.